Betting on the peak of US interest rates, asset management companies are selling the US dollar at the fastest pace in a year.

Investors are betting that the Federal Reserve will complete its rate hike cycle and conduct multiple rate cuts next year, leading to the fastest sell-off of the US dollar in a year.

According to media reports on Friday, DWS Group, with assets under management of $400 billion, stated that asset management companies are expected to sell 1.6% of their US dollar exposure this month, the largest monthly outflow since November last year.

According to DWS's data, there have only been six instances in the past twenty years where the US dollar has been sold off so rapidly, with the most recent occurrence in November last year when the US dollar index weakened by about 10% by the end of January.

It is reported that asset management companies have been "heavily" selling the US dollar every day since November 3, when US employment data came in weaker than expected. Analysts warn that the selling by asset management companies may just be the beginning of a long-term trend of reducing US dollar exposure by investors.

It is worth mentioning that despite recent liquidation, asset management companies are still overweight on the US dollar compared to other currencies, indicating that the weakness of the US dollar may continue.

Selling the US Dollar, Bullish on the Japanese Yen and Emerging Market Assets

Last year, driven by the Federal Reserve's rate hikes, the US dollar surged. As of the end of September, the US dollar index had risen by as much as 19%, bringing huge profits to hedge funds holding bullish positions. However, it then weakened significantly in the fourth quarter.

This year, due to strong economic data pushing interest rates to a 16-year high, the US dollar index rose by more than 7% between July and October. With October's US inflation rate cooling more than expected, the US dollar index has become weak, not far from its level at the beginning of this year.

The current pricing in the futures market suggests that the Federal Reserve will cut interest rates by more than 50 basis points before September next year. Regarding this change in trend, Geoff Yu, a foreign exchange strategist at BNY Mellon, said:

In the past 20 days, our custody clients have been selling the US dollar at the fastest pace this year. They are more inclined to buy the Japanese yen, Canadian dollar, and a range of Latin American currencies. It is expected that the Japanese yen will continue to strengthen, as the market widely expects the Bank of Japan to abandon its negative interest rate policy in the coming months, making shorting the yen less meaningful.

The weakness of the US dollar has also relieved emerging markets. Emerging markets find it easier to repay loans denominated in US dollars. After selling a large amount of hard currency debt this year, they are now attracting investors back to emerging markets. Florian Ielpo, Head of Macro Strategy at Lombard Odier Investment Managers, stated that they are overweight on emerging market stocks and commodities.

Francesco Sandrini, Head of Multi-Asset Strategies at Amundi, pointed out that after 2024, the US dollar is expected to continue to weaken:

Part of the reason is the expectation of improved relations between China and the US, and investors will no longer need the US dollar as a safe haven to the same extent. Investors prefer stocks in Mexico and Brazil, partly because they have performed well politically.